In the Baumol model, the optimal sale amount is _____ with higher interest rates and ______ with a higher cost of selling securities.

Question

Quizplus · Accepted Answer

In the Baumol model, the optimal sale amount is determined by the tradeoff between the opportunity cost of holding cash (which increases with higher interest rates) and the transaction cost of selling securities (which increases with higher cost of selling securities). Therefore, if interest rates increase, the optimal sale amount decreases, and if the cost of selling securities increases, the optimal sale amount also decreases. This is reflected in choice B.

In the Baumol Model, the Optimal Sale Amount Is _____